Nordea’s Jan von Gerich argues that higher energy prices from the Middle East conflict have sharply increased uncertainty around the ECB’s rate path, with April hikes now being priced but still seen as premature without clearer inflation spillovers. He notes the ECB’s focus on risk scenarios, historical readiness to react to energy shocks, and a preference to wait for June forecasts before shifting the baseline.

Energy shock tests ECB reaction function

"The pricing of ECB rate hikes has taken off in earnest. And at one point earlier this week, a 25bp rate hike was fully in prices as early as for the ECB’s next meeting in late April. That meeting likely comes too soon for the ECB to have a particularly accurate picture of how the higher energy prices feed into broader inflation pressures and whether there will be so-called second-round effects."

"The threshold for action has not been exceeded yet. Chief Economist Lane presented the ECB’s synthetic indicator of energy commodity prices earlier this week, which still puts the current episode in the medium category in terms of the size of the shock. Though the indicator was updated only as of 11 March 2026, the cutoff date for the staff forecasts, it suggests that it is not yet clear whether the ECB needs to respond."

"While it is not currently our baseline, we can find a number of arguments favouring a move as early as in April if the situation in the Middle East intensifies, energy prices rise further and energy futures curves suggest prices will remain higher for longer."

"We still tend to think it would be easier for the ECB to wait at least until the June meeting for better visibility on the how the situation in the Middle East evolves, how the economy reacts to the higher prices, what is the response from fiscal policy and, most importantly, how higher energy prices feed through to other prices and inflation expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)